I still remember when I realized that a real estate crisis was on its way. My wife and I were contemplating buying a home in Roanoke, Virginia, and began talking to a mortgage broker. When we saw the final offer, we realized that, if the real estate market continued on a stable path, and if the (then marginal) neighborhood continued to have a declining crime rate, and if the price of gas didn't go up, and if neither my wife nor I became seriously ill, then we would be great. In five years, when the rate went variable, we would refinance and everything would work out beautifully.That was in 2004.
Thinking about it, my wife and I soon realized that those were a lot of ifs; while we wanted the house, we knew that we couldn't base our financial future on a deck of cards. After turning down the offer, I thought more and more about it and began to get worried. If a lot of people were buying into the kind of mortgage that my wife and I had declined, and if they had similar expectations about refinancing when their rates went variable, then it seemed likely that the mortgage industry was sitting on a major time bomb.
Somewhere along the line, it has become clear that the housing market is only the tip of the credit iceberg. After all, while only a relatively small percentage of the population decided to buy into the real-estate boom, most adults have credit cards. Worse yet, all of the excesses of the mortgage market are mirrored in the credit card industry. For example, the tendency of some borrowers to exaggerate their income and downplay their expenditures has been blamed for a large percentage of the bad mortgages out there. By comparison, credit card forms allow applicants to claim household income as a grounds for repayment. Thus, applicants can legally pretend that their roommates' or parents' incomes influence their ability to pay a debt.
More importantly, most of the information on a credit card application is unverified. The applicant can claim any rent or salary that he or she wishes, comfortable in the knowledge that the company will not be able to check it out. Ultimately, the qualification for a successful application seems to lie in having a good credit history. However, as Joe Nocera pointed out in the December 1 New York Times, credit history doesn't really translate into ability to pay debts.
Perhaps the biggest danger lies in the way that the credit card companies have tried to manipulate their consumers. Using flashy balance-transfer offers to draw customers in, many subsequently raise rates or use a variety of questionable methods to levy fees. Added to this, many companies base credit limits on credit score, which means that some customers find themselves with credit limits that far outstrip their resources. This, in turn, encourages a sort of "Peter Principle" of credit: customers are promoted until they reach their level of insolvency.
Years of easy credit and aggressive marketing have left many consumers stretched to their absolute limits. In the face of a declining job market, an ugly housing market, and inflation, many consumers are likely to find that, as much as they might prize their good credit, they prize food even more. Given a choice between the two, they'll buy dinner and leave the Visa to stew. If credit card companies show the same ineptitude and intransigence demonstrated by Lehman, Bear Stearns, AIG, and the rest of the recent Wall Street losers, it's going to be a long, cold recession.
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Reader Comments (Page 1 of 1)
12-01-2008 @ 6:42PM
George said...
I feel no sympathy for the credit card companies they are worse than the banks. I just hope they next don't cry on the sleeves of Congress to help bail them out. They all can go under for all I care!
12-01-2008 @ 7:46PM
Mr.Mike said...
Will you people stop saying long cold ressecion deal with it and live your lives don't kill yourself
12-01-2008 @ 9:00PM
dom said...
credit card companies deserve to be destroyed. if you want to buy something online or have money on you without the mess. get a prepaid card. you go to a local cvs, riteaid, ect. you pay a small fee of $5 a month with no debt like most ppl ahve at the moment. pay your debt off asap and use prepaid cards. $5 a month is better then $500 a month for bills for 1 card
12-01-2008 @ 10:14PM
Darrell said...
Great Blog, insightful, & well written. I’m looking forward to reading more from you.
Thanks,
Darrell
http://www.AlwaysMakingMoney.com
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Learn From Experts, Increase Your Wealth
12-01-2008 @ 10:26PM
Anthony M. Freed said...
"The financial sector itself has been building for many decades into the largest single element of the American economy. We have moved to a world where far too many of us seemingly no longer make anything; we’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. In the process, we have inevitably added even more costs by creating ever more complex financial derivatives, in which huge and unfathomable risks have been built into the financial system." - John Bogle, Vanguard Founder.
http://information-security-resources.com/2008/12/01/the-financial-industry-takes-too-much-gives-too-little-bakes-unknown-liability-into-the-system/
The Wall Street Bailout is quickly reaching into the trillions-of-dollars, and many analysts are speculating as to the current running total of the outlays thus far, while other financial experts like John Bogle, the founder of the Vanguard Group, are questioning the legitimacy and impact of the costs to maintain this overly-complicated system even when economic conditions are good.
12-01-2008 @ 11:15PM
J. Dupuis said...
Four years ago I sold my string of muffler shops. Having worked most of my life for them and expanding my business through the years. Never did my wife and I ever think about purchasing a million dollar home before or after the business was sold. This year as the Presidential elections came nearer and I thought there was a chance that a socialist inclined President might be elected I made the decision to move the money I had made to banks in the Bahamas and the Cayman Islands. I was able to do this before the market nose dived. I could see no reason to be taxed at rates that will approach 72% when Jimmy Carter was in office. I don't have alot of tax deductions an was a setting duck for Democrats and their socialistic plans. I believe in individuals making it on their own, not government give aways, and thats what we are in for!
12-02-2008 @ 12:02AM
vtw said...
this is pretty good. Unlike the mortgage problem, where the government and the banks are intrinsically implicated together, the banks can ONLY BLAME THEMSELVES for the credit card problem --if there is indeed a problem.
12-02-2008 @ 6:55PM
jpcarey said...
Three things will be required to survive the complete disaster that is going to befall us in the next 6 months or less; silver coins to barter, a gun with plenty of amo, and a case of tuna fish. The government will be unable to help you, rely on yourself, and pray God that the 'new' batch of politians do a minimum of harm.